Michigan
Retirement
Research
University of
Executive Summary
Center
The Effects of Subjective Survival
on Retirement and Social Security
Claiming
Michael D. Hurd, James P. Smith,
and Julie M. Zissimopoulos
IB 2002-021
May 2002
M R
R C
Issues in Brief
Project #: UM 00-05
The leading theory used to understand retirement decisions is
the life cycle model, which suggests that people save during their
working years, when their income is high, so that they will have
money to spend during their retirement, when their income is
low. An implication of the theory is that people who expect to
be long-lived will retire at a later age because they will have to finance more years of retirement.
Because most people claim Social Security benefits shortly after retiring, their expectations about survival could affect the Social Security program by altering the ratio of retirees to workers.
In the longer term, increases in objective life expectancy could
translate into later retirement patterns. In this Issue in Brief, we
summarize a study that used data from the Health and Retirement Study to address these questions: Do those who expect to
be long-lived retire later? If so, how does life expectancy affect
the likelihood that they will claim Social Security benefits before
the normal retirement age?
We find only limited support for an effect of expected length
of life on retirement and claiming. While for many groups of retirees it is economically advantageous to delay claiming Social Security benefits past age 62, very few do so. Among the three
other predictions of the lifecycle model about Social Security
claiming behavior, we find support for only one: high rates of return on alternative investments lead to early claiming. We found
no support for the hypothesis that high wealth individuals delay
claiming or for the hypothesis that high levels of pension or Social Security wealth lead to early claiming. The high rates of Social Security claiming that occurs immediately upon turning 62
and the corresponding reluctance to annuitize, is a major puzzle.
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Theoretical background
A qualified worker who has retired before or at 62 has the
choice of claiming Social Security benefits at 62 or of delaying
claiming. The delay will result in higher Social Security benefits
once they are claimed, but the cost is the benefits lost (not
claimed) from 62 until the eventual claiming age. According to
the life-cycle model, the choice of whether to claim immediately
or to delay will depend on subjective life expectancy. Because the
total lifetime payout of Social Security benefits is the annual
amount multiplied by the number of years paid, someone who
expects to be long-lived may find it financially advantageous to
delay claiming: the higher benefit will more than compensate for
the benefits forgone in the initial years of delayed claiming.
Correspondingly a short-lived person may find it advantageous to claim early because of the shortened payout period. The
decision can also be viewed in the context of decision-making
under uncertainty. Those who subjectively believe they will be
long-lived have an increased risk of living to advanced old age.
They will want to protect against having a low level of economic
resources by taking action to increase their Social Security benefits. That action is to delay claiming: they give up benefits for
several years to obtain a higher future Social Security benefit, implicitly purchasing more Social Security annuities. Those who
subjectively expect to be short-lived believe they will not live long
enough to spend their wealth, so there is no reason to want larger
Social Security benefits.
The life-cycle model predicts that those with greater wealth
will tend to delay claiming. The more well-to-do are better able
to finance spending during the years of delay whereas the less
well-to-do may have to reduce consumption while they wait for
Social Security benefits to begin. The life-cycle model predicts
that the claiming decision will depend on the rate of return on
investments such as bonds and stocks. Someone who delays will
have to finance spending out of savings, and if the rate of return
on those savings is high it would be disadvantageous to take
money out of those investments. Thus, high rates of return
should be associated with early claiming.
Data
The Health and Retirement Study (HRS) is a biennial panel
survey that began in 1992 with a nationally representative sample
of 12,652 individuals born between 1931-41 and their spouses.
In addition to questions about their work lives, health and economic status, respondents were asked how likely it was that he or
she would live to age 85. Responses to the question on subject
survival predict actual mortality in the HRS panel. We use data
from four waves of the survey and match these data with restricted data on quarters of Social Security covered earnings to
determine whether a HRS respondent is eligible to receive Social
Security benefits.
Methods
We divided the sample into two parts: those who retire before reaching age 62 and those who retire or continue to work
after 62. We first relate the propensity to retire before 62 to the
expected likelihood of surviving to age 85 (a measure of expected
length of life available in the HRS). We then examine the effect
of subjective survival on claiming Social Security benefits at age
62 among those who are retired before 62. Because these issues
are complicated by the well-established relationship between economic status and life expectancy (poor people die at younger ages
and vice versa), our models account for wealth, income, wages,
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and other indicators of socioeconomic status. We also examine
the influence of other pension resources as influences on the retirement decision and compare defined benefit plans (similar to
Social Security) and defined contribution plans (such as 401k
plans). In a similar way we explore the influence of subjective
survival on retirement and on Social Security claiming after age
62.
Summary of Major Findings
•
•
•
We find that for many groups of retirees it is economically advantageous to delay claiming Social Security benefits past age 62. However, very few do so. For example,
72 percent of workers who retire before age 62 claim
within two month of reaching age 62. Among workers
who retire by age 63, 81 percent claim benefits by age 63.
•
probability of retirement by 141 percent.
Among workers who retire before age 62, very few observable characteristics differentiate early and late claimers
and there is no systematic pattern of claiming as a function of the probability of living to age 85. Stockowners
have a greater probability of claiming early benefits, which
is consistent with the view that their alternative investment return is higher than those who do not own stock.
•
Among individuals in the labor force at age 62, workers
who state there is no chance they will be alive at age 85
are more likely to retire and claim Social Security benefits
by age 63.
•
We find that in a population of 52 year-old workers, 52
percent of those with no chance of living to age 85 will
receive Social Security benefits within two months of
turning age 62, and 46 percent of those with a 50 or a 100
percent chance of living to age 85 will be in receipt of Social Security benefits within a few months of turning 62.
Among workers who retire before age 62, there was no
systematic pattern of retirement by the likelihood of living
to age 85. Among those still working at age 62, those
who stated there was no chance they would live to age 85
were 28 percent more likely to retire than those who
stated there was a 50 percent chance they would live to
age 85.
Conclusions
Pension eligibility and health status have large effects on
retirement. Workers under age 62 who become eligible
for Defined Benefit pension benefits between survey
waves are 120 percent more likely to retire than workers
who do not have such plans. Among workers under age
62, having a work limiting health condition increases the
Overall, we find some limited support for an effect of expected length of life on retirement and claiming: those who expect to be short-lived (have low subjective survival), and are still
working at age 62, are both more likely to retire and to claim
benefits immediately than those who expect a longer life. Among
the three other predictions of the lifecycle model about Social Security claiming behavior, we found support for only one. We
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find limited evidence that high rates of return on alternative investments lead to early claiming. We find no support for the hypothesis that high wealth individuals delay claiming or for the hypothesis that high levels of pension or Social Security wealth lead
to early claiming. The high rates of Social Security claiming that
occurs immediately upon turning 62 and the corresponding reluctance to annuitize, is a major puzzle.
Michael D. Hurd is Senior Economist at RAND and Director of
the RAND Center for the Study of Aging.
James P. Smith holds the RAND Chair in Labor Markets and
Demographic.
Julie M. Zissimopoulos is an Associate Economist at
RAND.
This work was supported by a grant from the Social Security Administration through the Michigan Retirement Research Center
(Grant # 10-P-98358-5). The opinions and conclusions are solely
those of the authors and should not be considered as representing the opinions or policy of the Social Security Administration or
any agency of the Federal Government.
Michigan Retirement Research Center
Institute for Social Research
University of Michigan
426 Thompson Street, Room 3026
Ann Arbor, MI 48104-2321
Phone (734) 615-0422
Fax (734) 615-2180
http://www.mrrc.isr.umich.edu
mrrc@umich.edu
Regents of the University of Michigan
David A. Brandon, Ann Arbor
Laurence B. Deitch, Bingham Farms
Daniel D. Horning, Grand Haven
Olivia P. Maynard, Goodrich
Rebecca McGowan, Ann Arbor
Andrea Fischer Newman, Ann Arbor
S. Martin Taylor, Grosse Pointe Farms
Katherine E. White, Ann Arbor
Mary Sue Coleman, ex officio
The Michigan Retirement Research Center is supported by a grant
from the Social Security Administration (grant number 10-P-98358-5).
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